Tokyo Electron Stock Soars After Merger News

Shares of Tokyo Electron soared 13% Wednesday after the Japanese semiconductor equipment maker said it had agreed to merge with Santa Clara-based Applied Materials Inc.

Japan’s Tokyo Electron Chairman Tetsuro Higashi, left, and U.S. semiconductor giant Applied Materials CEO Gary Dickerson announce their agreement to merge next year at a press conference in Tokyo on Sept. 24.

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Stopping at ¥5,550 – the cap on daily price movements for the company’s shares set by the Tokyo Stock Exchange – Tokyo Electron shares progressed most of the way toward the roughly ¥5,612 mark the company’s stock is worth under the merger’s allocation ratio: 3.25 shares of AMAT for each share of Tokyo Electron.

The combination of the No. 1 and 3 industry players will result in a $29 billion juggernaut commanding about 25% of the global market.

Analysts were largely complimentary of the terms of deal.

“While regulatory approval could conceivably be slowed in countries such as South Korea that are striving to cultivate their own SPE (semiconductor production equipment) makers, there are few equipment types in which Tokyo Electron and AMAT truly compete,” says Credit Suisse analyst Hideyuki Maekawa, adding that there would likely be little possibility of the deal being derailed.

“With pressing costs, such industry consolidation does not come as a complete surprise, although lately we are more accustomed to Japanese firms acting as the acquirers rather than acquirees,” says Naoki Fujiwara, fund manager at Shinkin Asset Management.

SPE makers have been seeking to change their business model from pure equipment sales to a fee-based service and maintenance models for some time, noted Nomura Securities analyst Tetsuya Wadaki.

The burden of negotiating with customers these changes to the sales platform has become too great for any one company to bear on its own, some industry experts say. Through the merger, it is hoped the industry as a whole should be able to respond more effectively to the onerous product and pricing schemes required of them.

The rapid advance of mobile devices as well as smaller and more energy efficient chips requiring more costly equipment to make them hurt investor interest in Tokyo Electron. The firm’s stock had severely underperformed the major indexes this year, flying in the face of the Nikkei Stock Average’s 41% rally.

But news of the merger generated considerable investor buzz Wednesday. Tokyo Electron was the single heaviest-weighted positive Nikkei constituent on an otherwise sluggish day that lacked any solid trading cues.
Same-sector firms also benefited from the fallout, including Hitachi High Tech, which added 1.8% and Tokyo Seimitsu, which gained 0.2%.

Over the short term, industry rivals may be favorably affected in terms of competition for orders as customers are likely to be weary of the emergence of a giant equipment manufacturer, Nomura’s Mr. Wadaki added.

“Purely based on the market share it will command, the new combined AMAT-Tokyo Electron entity should generate plenty of investor interest once its shares list,” said Shinkin Asset Management’s Mr. Fujiwara. “But it would be speculative to say that more moves of this type are in the offing.”